Retaining talented employees is important but challenging for organizations. Key challenges include asymmetric information where it is difficult to distinguish top performers, potential for adverse selection if high performers leave for better opportunities, and agency costs that arise from differing goals between employees and the organization. Providing incentive compensation that aligns employee and owner interests can help address these issues by motivating employees and reducing problems like shirking. Improving job satisfaction is also important to encourage talented staff to remain with the company long-term.
Retaining talented employees is important but challenging for organizations. Key challenges include asymmetric information where it is difficult to distinguish top performers, potential for adverse selection if high performers leave for better opportunities, and agency costs that arise from differing goals between employees and the organization. Providing incentive compensation that aligns employee and owner interests can help address these issues by motivating employees and reducing problems like shirking. Improving job satisfaction is also important to encourage talented staff to remain with the company long-term.
Retaining talented employees is important but challenging for organizations. Key challenges include asymmetric information where it is difficult to distinguish top performers, potential for adverse selection if high performers leave for better opportunities, and agency costs that arise from differing goals between employees and the organization. Providing incentive compensation that aligns employee and owner interests can help address these issues by motivating employees and reducing problems like shirking. Improving job satisfaction is also important to encourage talented staff to remain with the company long-term.
Kevin J . Sigler Article information: To cite this document: Kevin J . Sigler, (1999),"Challenges of employee retention", Management Research News, Vol. 22 Iss 10 pp. 1 - 5 Permanent link to this document: http://dx.doi.org/10.1108/01409179910781823 Downloaded on: 30 September 2014, At: 09:46 (PT) References: this document contains references to 0 other documents. To copy this document: permissions@emeraldinsight.com The fulltext of this document has been downloaded 5398 times since 2006* Users who downloaded this article also downloaded: Natalie Govaerts, Eva Kyndt, Filip Dochy, Herman Baert, (2011),"Influence of learning and working climate on the retention of talented employees", J ournal of Workplace Learning, Vol. 23 Iss 1 pp. 35-55 Gaurav Bagga, (2013),"How to keep the talent you have got", Human Resource Management International Digest, Vol. 21 Iss 1 pp. 3-4 Kate Pritchard, (2008),"Effectively measure employee engagement", Strategic HR Review, Vol. 7 Iss 2 pp. - Access to this document was granted through an Emerald subscription provided by 523001 [] For Authors If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.com Emerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services. Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. *Related content and download information correct at time of download. D o w n l o a d e d
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( P T ) Chal lenges of Em ployee Re ten tion by Kevin J. Sigler Re ten tion of tal ented em ploy ees can be a source of ad van tage for an or gani sa tion. But there are chal lenges in at tempt ing to re tain these em ploy ees (Bar ney [1991]; Werner felt [1984]; Pett man [1975]). In a per fect world the pro duc tive em ploy ees are en cour aged to stay within the or gani sa tion and the non pro duc tive poor per - form ers are en cour aged to leave. In fact, if it were meas ur able a com pany would keep each em ployee 1) whose con tri bu tion pro duces a posi tive risk ad justed profit for the firm and 2) who will also have a more posi tive in flu ence on the firm than any em ployee hired to re place him or her (tak ing into ac count the cost of hir ing the new em ployee). But be cause of prob lems such as asym met ric in for ma tion it is no easy task to carry out this goal. This ar ti cle ad dresses the prob lems, costs and meth ods used to re tain pro duc tive em ploy ees. Costs of Em ployee Re ten tion The loss of tal ented em ploy ees may be very det ri men tal to the com pa nys fu ture suc cess. Out stand ing em ploy ees may leave an or gani sa tion be cause they be come dis sat is fied, un der paid or un mo ti vated (Coff [1996]), and while try ing to re tain em ploy ees within the or gani sa tion they may pres ent other chal lenges as well. They may de mand higher wages, not com ply to or gani sa tion prac tices, and not in - ter act well with their co work ers or com ply to their man ag ers di rec tions. Asym met ric In for ma tion Be sides these prob lems asym met ric in for ma tion or lack of in for ma tion about the em ploy ees per form ance may com pli cate an organi sa tions en deav our to re tain pro duc tive em ploy ees. With out ade quate in for ma tion an or gani sa tion may not be able to dis tin guish pro duc tive work ers from non pro duc tive ones. Em ploy ees of - ten may take credit for the suc cesses and de flect fail ures to other em ploy ees. This is known as a moral haz ard prob lem. In many in stances com pa nies may re ward or pun ish em ploy ees for an or gani sa tion out come for which they had no im pact (Kerr [1975]). In suf fi cient in for ma tion about em ploy ees per form ance may re sult in ad verse se lec tion by them (Gross man & Hart [1986]). The bet ter em ploy ees may move to other or gani sa tions for bet ter op por tu ni ties. The co work ers who can not im prove their po si tions are more likely to stay. This is es pe cially pos si ble when due to in - ade quate in for ma tion out stand ing per form ance is not re warded. Non pro duc tive and pro duc tive work ers end up re ceiv ing the same or nearly the same com pen sa - tion and pack age of perks be cause of man age ments in abil ity to dis tin guish tal - ented em ploy ees from the rest of the la bour force in the or gani sa tion. The prob lem of at tempt ing to keep tal ented mem bers of the work force is fur - ther com pli cated be cause of bounded ra tion al ity (Si mon [1976]). It is an other re - sult of asym met ric in for ma tion where both the man ager does not know the in for ma tion for which to ask from the em ployee and the em ployee does not know what to pro vide. There fore, pro duc tive work ers can not dis tin guish them selves from non pro duc tive co work ers. 1 Vol ume 22 Num ber 10 1999 Bio graphi cal Note Dr. Kevin J. Sigler can be con tacted at the De part ment of Eco nom ics and Fi nance, Cam eron School of Busi ness, Uni ver sity of North Caro lina at Wil ming ton, 601 South Col lege Road, Wil ming ton, North Caro lina 28403 - 3297, USA. D o w n l o a d e d
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( P T ) Agency Costs Even if an or gani sa tion is for tu nate enough to re tain tal ented em ploy ees, the com - pany may still have to cope with agency costs re sult ing from them and their col - leagues. When in for ma tion about an em ploy ees ac tivi ties is dif fi cult to gather, the em ployee (or agent of the share hold ers) may be mo ti vated to act in his own in - ter est which may di verge from the in ter est of the or gani sa tion. This di ver gence of in ter ests re sults in costs to the or gani sa tion in the form of ex - ces sive per qui site con sump tion, shirk ing of job re spon si bili ties and poor in vest - ment de ci sion mak ing. Jensen and Meck ling [1976] ex plained that it is in an em ploy ees in ter est to over con sume perks and shirk job re spon si bili ties of the firm if they are not sole own ers of the or gani sa tion. Em ploy ees may also be en ticed to make sub- optimal in vest ment de ci sions for the firm. Since most com pany em ploy ees have their wealth tied up in the or gani sa - tion for which they work, em ploy ees may at tempt to make in vest ment de ci sions which are less risky than the stock hold ers of the firm would pre fer. This is done to re duce the risk of fail ure by the com pany which pro tects the non- diversified em - ployee from loss of wealth. This in vest ment strat egy may also re duce the re turn on in vest ment that the di ver si fied own ers of the firm de sire (Mur phy [1985]). The em ploy ees or agents of the or gani sa tion may also use a short sighted ap - proach in in vest ment se lec tion to en hance their own ca reer chances (Naray anan [1985]). The em ployee can sig nal the la bour mar ket his su pe ri or ity through the se - lec tion of a fast start ing proj ect which may fiz zle out later for the firm (of course by the time the true value of the short sighted proj ect is re vealed the em ployee has moved on to a bet ter job). This strat egy may cause the firm to miss out on prof it - able long- term proj ects or much needed re search and de vel op ment. Em ploy ees may also at tempt to in crease the size of the firm through ac qui si - tions and proj ect se lec tion re gard less of the ef fect on com pany prof it abil ity in or - der to in crease their own power base within the firm. Reme dies to Em ployee Re ten tion Prob lems In cen tive com pen sa tion is one method which is used to re duce the prob lems sur - round ing the ef fort to re tain em ploy ees. By align ing the in ter ests of the em ploy ees with the own ers of the firm through pay in cen tives, the agency prob lems of ex ces - sive per qui site con sump tion, shirk ing and poor in vest ment de ci sion mak ing may be re duced. In cen tive pay may also give the em ployee the in cen tive to stay in the or gani sa tion, pro vide a com peti tive wage so the em ployee is paid fairly, and en - cour age the em ployee to com ply to or gan isa tional prac tices. In ad di tion to us ing pay in cen tives to re ward the em ployee for reach ing com pany goals and dem on - strat ing loy alty to the or gani sa tion, ef forts can be made by the or gani sa tion to im - prove job sat is fac tion. This may also in crease the num bers of tal ented em ploy ees who stay in the com pany. In cen tive Pay In cen tive pay may con sist of cash bo nuses for em ploy ees upon reach ing pre de ter - mined goals. The bo nus is nor mally tied to ac count ing meas ures and many times 2 Man age ment Re search News D o w n l o a d e d
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( P T ) spe cifi cally to the em ploy ees job area. Stock own er ship by the em ployee is an other type of pay in cen tive. It in es sence makes the em ployee a stock holder of the or gani sa tion align ing the in ter ests of the em ployee with the own ers. Em ployee stock own er ship can come through re - stricted stock plans where own er ship of the stock is not trans ferred to the em - ployee un til af ter a spe cific pe riod of time has passed or a spe cific goal has been achieved. Other stock own er ship by em ploy ees may come through Stock Ap pre - cia tion Rights (SAR) or Phan tom Stock plan where em ploy ees bene fit if the value of the firms stock in creases. Stock op tions are also used to mo ti vate em ploy ees and re duce agency costs and re ten tion prob lems. Em ploy ees have the right through these op tions to pur chase the com pany stock at a pre de ter mined price. This pro vides em ploy ees the in cen tive to drive the stock price higher through their work ef fort. But each of the pay com po nents dis cussed above if in cluded in an em ploy ees pay pack age may pro duce other prob lems for an or gani sa tion. Cash bo nuses are many times based on the per form ance of firm which is meas ured us ing ac count ing num bers. This may mo ti vate an em ployee to ma nipu late the tim ing of reve nues and ex penses over which they have con trol to maxi mise their own pay out (Healey [1985]). Cash bo nuses may also fo cus the em ployee on short- term per form ance of the firm at the det ri ment of long- term per form ance. Com pen sa tion in the form of com pany com mon stock may have the draw back of not be ing spe cific enough to truly mo ti vate the em ployee to work hard, stay in the or gani sa tion and com ply with prac tices (Larcker [1983]}. For in stance, the stock of the com pany is driven in large part by how well the over all mar ket for stocks per forms. There fore the price of most com pany stock moves up and down in value de pend ing on the over all econ omy over which the em ployee has no con - trol. Also since the stock price is not tied solely to the em ploy ees job, an em - ployee may ride the ef forts of one or a few col leagues who make de ci sions and put forth ef fort which in crease share value. One way to re duce the short com ings of each pay com po nent is to pay com pany em ploy ees with a com bi na tion of bo nuses, stock pay out and sal ary. An ade quate base sal ary al lows the or gani sa tion to com pete for em ploy ees in the la bour mar ket ef fec tively. In clud ing stock own er ship as a part of an em ploy ees com pen sa tion pack age off sets the prob lems of ac count ing ma nipu la tion by com pany em ploy ees and also may mo ti vate em ploy ees to fo cus on long- term per form ance of the firm (us ing re stricted stock). Cash bo nuses based on spe cific per form ance of the em - ployee mo ti vates the worker not to sit back and ride the coat tails of pro duc tive col - leagues. This may be the rea son ex ecu tives as well as other em ploy ees in many or gani sa tions have com plex pay pack ages. Job Sat is fac tion Be sides us ing com pen sa tion, re tain ing tal ented em ploy ees may also be ac com - plished through im prov ing their job sat is fac tion. Man age ment can in sure tal ented em ploy ees are given auton omy in their job func tions and are given mean ing ful as - sign ments, al low ing them to be in volved in the de ci sion mak ing for their area of ex per tise. Pleas ant work ing con di tions can also en tice pro duc tive work ers to stay in their or gani sa tion and not look else where. In ad di tion, of fer ing these tal ented 3 Vol ume 22 Num ber 10 1999 D o w n l o a d e d
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( P T ) em ploy ees train ing to keep them cur rent on their job func tions and al low ing them to learn new skills can also be util ised to im prove em ployee sat is fac tion with the or gani sa tion (Rice, Gen tile, & McFar lin [1991]). Pay in cen tives will help align the em ploy ees in ter ests with those of the organi - sa tions own ers and ef forts to im prove job sat is fac tion through em ployee auton - omy, train ing, and pleas ant work ing con di tions will help re tain tal ented em ploy ees. But be cause of asym met ric in for ma tion it may be dif fi cult to en cour - age poor per form ers to leave the or gani sa tion. Bet ter moni tor ing of em ploy ees through audits and sur veil lance may help dis tin guish pro duc tive from non pro duc - tive em ploy ees. But even if an or gani sa tion can dis tin guish tal ented em ploy ees from poor per - form ers it still needs to as sess the im pact the em ployee is mak ing on his co work - ers. Em ploy ees though tal ented may have a nega tive im pact on the other em ploy ees and re duce the pro duc tiv ity of those around them. Or, tal ented em ploy - ees who do not buy into the mis sion of the firm may in flu ence oth ers to ques tion the di rec tion of the or gani sa tion and there fore pro duce a nega tive work at mos - phere. Meth ods to as sess the poi son ing im pact of these kinds of em ploy ees must be util ised by man age ment and ef forts to re move these types of work ers must be con sid ered in con junc tion with pay in cen tives and im prov ing job sat is fac tion. Con clu sion Re tain ing tal ented pro duc tive em ploy ees and elimi nat ing poor per form ing em - ploy ees is es sen tial to the long run suc cess of an or gani sa tion. But there are prob - lems such as ad verse se lec tion, moral haz ard and agency costs as so ci ated with reach ing this goal. In cen tive com pen sa tion and in creas ing em ployee job sat is fac - tion may be use ful in ad dress ing the chal lenges sur round ing em ployee re ten tion. Ref er ences Bar ney, J.B., 1991, Firm Re sources and Sus tained Com peti tive Ad van tage, Jour nal of Man age ment, Vol. 17, pp.99- 120. Coff, R.W., 1997, Hu man As sets and Man age ment Di lem mas: Cop ing with Haz - ards on the Road to Resource- Based The ory, Acad emy of Man age ment Jour nal, Vol. 22, pp.374- 402. Gross man, S.J. & O.D. Hart, 1986, The Costs and Bene fits of Own er ship: A The - ory of Ver ti cal and Lat eral In te gra tion, Jour nal of Po liti cal Econ omy, Vol. 94, pp.691- 719. Healey, P., The Ef fect of Bo nus Schemes on Ac count ing De ci sions, Jour nal of Ac count ing and Eco nom ics, April 1985, pp.85- 107. Jensen, M. & W. Meck ling, 1976, The The ory of the Firm: Mana ge rial Be hav ior, Agency Costs and Own er ship Struc ture, Jour nal of Fi nan cial Eco nom ics, pp.305- 360. Kerr, S., 1975, On the Folly of Re ward ing A While Hop ing for B, Acad emy of Man age ment Jour nal, Vol. 18, pp.769- 782. 4 Man age ment Re search News D o w n l o a d e d
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( P T ) Larcker, D., The As so cia tion Be tween Per form ance Plan Adop tion and Cor po - rate Capi tal In vest ment, Jour nal of Ac count ing and Eco nom ics, April 1983, pp.3-30. Mur phy, K., Cor po rate Per form ance and Man age ment Re mu nera tion, Jour nal of Ac count ing and Eco nom ics, April 1985, pp.11- 42. Naray anan, M., Mana ge rial In cen tives for Short Term Re sults, Jour nal of Fi - nance, De cem ber 1985, pp.1469- 1484. Pett man, B.O., (Ed.), 1975, La bour Turn over and Re ten tion, New York, John Wiley. Rice R.W., D.A. Gen tile, & D.B. McFar lin, 1991, The Clash of Cul tures: Man ag - ers Man ag ing Pro fes sion als, Bos ton, Har vard Busi ness School. Si mon, H.A., 1976, Ad min is tra tive Be hav ior: A Study of Decision- making Proc - esses in Ad min is tra tive Or gani za tion, New York, Free Press. Werner felt, B., 1984, A Re source Based View of the Firm, Stra te gic Man age - ment Jour nal, Vol. 5, pp.171- 180. 5 Vol ume 22 Num ber 10 1999 D o w n l o a d e d
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